07/30/2009

Treasury Taps Nine Managers for Toxic-Debt Program

Treasury Taps Nine Managers for Toxic-Debt Program 
by Rebecca Christie

July 8 (Bloomberg) -- The U.S. Treasury named BlackRock Inc., Invesco Ltd. and seven other managers for the Public- Private Investment Program, in an effort to remove as much as $40 billion in troubled assets from financial institutions. 

The government will invest as much as $30 billion, and the nine participants may raise a total of $10 billion, the Treasury said today in a statement. GE Capital Real Estate, Marathon Asset Management LP and AllianceBernstein LP were also selected. Pacific Investment Management Co., operator of the world’s largest bond fund, pulled out, citing “uncertainties regarding the design and implementation of the program.” 

Today’s announcement is a scaled-down start for a program that was promoted in March as having the potential to reach $1 trillion in distressed loans, mortgage-backed securities and other assets. Initial plans for the program called for $75 billion to $100 billion from the $700 billion Troubled Asset Relief Program alongside private-sector investment. 

“While utilization of legacy securities will depend on how actual economic and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate,” Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben S. Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair said in a joint statement. 

Oaktree Capital Management LP, RLJ Western Asset Management LP, the TCW Group Inc. and Wellington Management Co. were the other firms selected to participate. 

Pimco Withdraws 

Pimco, the Newport Beach, California-based unit of the Munich-based insurer Allianz SE, said today it withdrew its application last month and instead is participating in other financial rescue efforts. Bill Gross, Pimco’s co-chief investment officer, described the program in an interview in March as “win-win-win” solution for banks, the government and investors. 

PPIP funds will initially target commercial mortgage-backed securities and non-agency mortgage backed securities issued before 2009, with an initial rating of AAA or its equivalent, the department said. The total market for these securities is about $2 trillion. 

As envisioned, the fund managers will raise $10 billion, the Treasury will invest $10 billion and then the Treasury will lend $20 billion to the public-private funds. 

Investor Options 

Investors will have a choice of accepting this 100 percent debt-to-equity ratio, or taking on only 50 percent debt and retaining eligibility for the Fed’s Term Asset-Backed Securities Lending Facility, a Treasury official said on a conference call. The TALF is open to a different set of securities than the PPIP and has different eligibility terms. A Treasury official told reporters that they currently expect participants to choose the 100 percent debt option. 

Private investors in the funds will be subject to a maximum investment of 9.9 percent in the PPIP funds, the Treasury said, meaning each fund must find at least 5 investors. There is no other limit on foreign investor participation. 

The fund managers each must contribute a minimum of $20 million of their own capital and also raise at least $500 million from private investors within 12 weeks. The first closing on an established PPIP fund is expected in August, the Treasury said. 

The asset managers named today will work on the Legacy Securities Program, one half of the original initiative. A second component dealing with whole loans, to be run by the FDIC, was delayed last month. 

Managers’ Respond 

“The combination of private and public sector investments has the potential to make a significant impact on the market for legacy securities,” Joseph Parsons, president and chief executive officer of GE Capital Real Estate, said in a statement. GE Capital Real Estate, part of Stamford, Connecticut-based GE Capital Corp., manages $80 billion in assets. 

Lisa Finkel, spokeswoman at Boston-based Wellington Management, said in a statement the company was “honored” to be selected. Closely held Wellington managed $396 billion on March 31. 

BlackRock, the largest U.S. publicly traded asset manager, plans to raise money from institutions and individual investors, Lauren Trengrove, a spokeswoman for the New York-based company, said in an e-mailed statement. BlackRock managed $1.28 trillion as of March 31. 

FDIC’s Role 

Geithner, Bair and Bernanke said the FDIC is committed to making the Legacy Loan Program available as needed. The FDIC is planning to test its PPIP mechanisms in July when selling the assets from a failed bank, the regulators said. The FDIC previously has named Georgia’s failed Silverton Bank as its potential test case. 

For the securities program, TARP-related executive compensation limits will not apply to asset managers or private investors, provided the funds are set up so that the asset managers and their employees aren’t controlling investors, the Treasury said in a fact sheet accompanying its statement. 

The PPIP funds will be allowed to buy securities from sellers eligible under the TARP law. In general, sellers must be established and regulated in the U.S. and not owned by a foreign government, except under certain circumstances related to failed institutions, the Treasury said. 

Every quarter, the Treasury will release information on the 10 largest PPIP holdings, the investors said. 

The Treasury also released conflict-of-interest rules, developed in consultation with the Fed’s compliance staff, fund managers, and the Special Inspector General for the TARP, the Treasury said. 

The nine asset managers also have established relationships with 10 small, woman-owned and minority-owned financial services businesses, the Treasury said. 

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net 
 

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